Telephone and Data Systems Q2 Earnings Preview (Rating Upgrade)

Core Viewpoint - The analysis updates the outlook on Telephone and Data Systems (TDS) ahead of Q2 2024 earnings, with a shift in rating from hold to buy, reflecting a potential upside from the sale of US Cellular assets [1][24]. Financial Performance - TDS has seen a 32% return since the last analysis, outperforming the S&P 500, which yielded 7% [1]. - For Q2 2024, TDS is expected to announce an EPS of -$0.13 and revenue of $1.24 billion, both down sequentially and year-over-year [15]. US Cellular Sale - The sale of US Cellular is a significant focus, with management working to advance the deal while maintaining business stability [2]. - The potential sale price range for TDS shares is estimated between $17.30 and $37+, depending on the deal's outcome [2][32]. - T-Mobile's acquisition of US Cellular's wireless business and 30% of its spectrum for $4.4 billion is anticipated to close in mid-2025, pending regulatory approval [17]. Regulatory Environment - Regulatory scrutiny has increased, with a group of senators requesting careful examination of the T-Mobile and US Cellular deal, raising concerns about market consolidation and consumer impact [6][10]. - T-Mobile has experience in navigating regulatory challenges, as seen in its previous merger with Sprint, which may mitigate risks associated with the current deal [11][32]. Valuation and Price Target - The current market cap of US Cellular is $4.49 billion, with TDS owning 83% of it, suggesting a potential value of approximately $4.5 billion for TDS shareholders, translating to an upside of over 80% from the current market cap of $2.4 billion [21]. - Price targets for TDS range from $22.50 to $35 per share, with a best-case scenario indicating an 80-90% growth in share price if the deal proceeds with concessions [32][30]. Guidance and Future Outlook - TDS's guidance for service revenues and adjusted EBITDA remains unchanged, indicating stability in financial expectations despite the ongoing sale process [4]. - The analysis suggests that the most likely scenario is the merger proceeding with concessions, which would positively impact TDS's valuation [32].